The two leading online consumer-to-consumer platforms use very different revenue models: eBay.com in the United States uses a brokerage model in which sellers pay eBay on a transaction basis, whereas Taobao.com in China uses an advertising model in which sellers can use the basic platform service for free and pay Taobao for advertising services to increase their exposure. This paper studies how the chosen revenue model affects the revenue of a platform, buyers' payoffs, sellers' payoffs, and social welfare. We find that when little space can be dedicated to advertising under the advertising model, the brokerage model generates more revenue for the platform than the advertising model. When a significant proportion of space is dedicated to advertising under the advertising model, matching probability on a platform plays a critical role in determining which revenue model can generate more revenue: If the matching probability is high, the brokerage model generates more revenue; otherwise, the advertising model generates more revenue. Buyers are always better off under the advertising model because of larger participation by the sellers in the platform's free service. Sellers are better off under the advertising model in most scenarios. The only exception is when the matching probability is low and the platform dedicates considerable space to advertising. Under these conditions, the sellers with payoffs similar to the marginal advertiser who is indifferent about advertising can be worse off under the advertising model. Finally, the advertising model generates more social welfare than the brokerage model
In this paper, we develop a game theoretic model to study the pricing of e-books and e-readers under two pricing models: wholesale and agency. We analyze pricing strategies for a publisher and a retailer. We identify the complementary relationship between e-books and e-readers as the main reason for the retailer to set a low e-book price in the wholesale model. Comparing the wholesale and the agency models, we find, in a wide range of market conditions, the price for e-book readers is lower in the agency model, leading to a higher e-book market share. However, a higher e-book price in the agency model lowers e-book consumption. Overall social welfare is lower in the agency model than in the wholesale model. While total consumer surplus is slightly higher in the agency model, largely because of a lower e-reader price, business profit is lower. The publisher, surprisingly, is worse off under the agency model.
Outsourcing of software development allows a business to focus on its core competency and take advantage of vendors' technical expertise, economies of scale and scope, and their ability to smooth labor demand fluctuations across several clients. However, contracting a software project to an outside developer is often quite challenging because of information asymmetry and incentive divergence. A typical software development contract must deal with a variety of interrelated issues such as the quality of the developed system, the timeliness of delivery, the effort and cost associated with the project, the contract payment, and the postdelivery software support. This paper presents a contract-theoretic model that incorporates these factors to analyze how software outsourcing contracts can be designed. We find that despite their relative inefficiency, fixed-price contracts are often appropriate for simple software projects that require short development time. Time-and-materials contracts work well for more complex projects when the auditing process is efficient and effective. We also examine a type of performance-based contract called quality-level agreement and find that the first-best solution can be reached with such a contract. Finally, we consider profit-sharing contracts that are useful in situations where the developer has more bargaining power.
Media and network companies are increasingly providing digital media online. We develop a model to examine optimal strategies for media providers to utilize the online channel to distribute digital media. We examine a number of options for media providers. Our results suggest that media companies should sell programs online when content quality is relative high and online access cost is low. When online access cost is relative high, media providers could use the advertising strategy. Overall, companies are better off providing both pricing and advertising options to consumers. We derive the optimal price and advertising level, and analyze the factors that affect the price and advertising decisions. We find that as advertisement revenue rate increases, advertising level should be kept low. In addition, media companies should set online price and advertising level with consideration of the traditional channel in order to avoid channel cannibalization. We also analyze the advertising level in the traditional channel. Our results suggest that as digital video recorder technologies provide more convenience to consumers, media companies should increase, rather than decrease, revenues from advertising.
Traditional development of large-scale information systems is based on centralized information processing and decision making. With increasing competition, shorter product life-cycle, and growing uncertainties in the marketplace, centralized systems are inadequate in processing information that grows at an explosive rate and are unable to make quick responses to real-world situations. Introducing a decentralized information system in an organization is a challenging task. It is often intertwined with other organizational processes. The goal of this research is to outline a new approach in developing a supply chain information system with a decentralized decision making process. Particularly, we study the incentive structure in the decentralized organization and design a market-based coordination system that is incentive aligned, i.e., it gives the participants the incentives to act in a manner that is beneficial to the overall system. We also prove that the system monotonically improves the overall organizational performance and is goal congruent.
Although electronic commerce (EC) has created new opportunities for businesses as well as consumers, questions about consumer attitudes toward Business-to-Consumer (B2C) e-commerce vis-a-vis the conventional shopping channels continue to persist. This paper reports results of a study that measured consumer satisfaction with the EC channel through constructs prescribed by three established frameworks, namely the Technology Acceptance Model (TAM), Transaction Cost Analysis (TCA), and Service Quality (SERVQUAL). Subjects purchased similar products through conventional as well as EC channels and reported their experiences in a survey after each transaction. Using constructs from the three frameworks, a model was constructed and tested to examine the determinants of the EC channel satisfaction and preference using the survey data. Structural equation model analyses indicate that metrics tested through each model provide a statistically significant explanation of the variation in the EC consumers' satisfaction and channel preference. The study found that TAM components--perceived ease of use and usefulness--are important in forming consumer attitudes and satisfaction with the EC channel. Ease of use also was found to be a significant determinant of satisfaction in TCA. The study found empirical support for the assurance dimension of SERVQUAL as determinant in EC channel satisfaction. Further, the study also found general support for consumer satisfaction as a determinant of channel preference.